More Organizations Considering Investment Outsourcing

According
to the survey, 31% of those surveyed with assets in the $501 million to $1
billion range are also considering outsourcing.

A
major reason for delegating some or all fiduciary responsibility for investment
decisions relates to the need for speed and sophisticated decision-making in a
volatile, fast-moving market environment.

Tom
Murphy, U.S. head of fiduciary management at Mercer, told PLANADVISER that
a number of factors are leading committees to consider investment outsourcing.
He said that typically committees only meet once per quarter, which means they
cannot execute decisions in a timely fashion. He also mentioned that most
committee members are not investment professionals; therefore, it would be a
lot more straightforward and efficient to give the investment responsibilities
to an expert.

“We
believe the trend to investment outsourcing will accelerate due to a
combination of factors: volatile market conditions, the desire to take faster
and more considered investment decisions, and the challenge of staffing to
adequately monitor performance and risk in real time,” said Murphy.

Some
27% of respondents to the Mercer survey also state that they have missed
investment opportunities due to the time it takes to make or implement
decisions, a 6% increase from a similar survey that Mercer conducted in June
2010. The largest impediments to delay in decision-making have been market
volatility (26%) and not enough expertise (20%). The largest impediments to
executing asset allocation and manager changes have been insufficient staff
(18%) and market volatility (15%).

As
market conditions continue to be challenging, one-third of respondents take
more than three months to make a decision about asset allocation or manager
changes, and 11% take six months to a year. Lack of speed of execution, once a
decision has been taken, compounds the problem. Nearly half the respondents to
the survey (44%) take from one to three months to execute asset allocation or
manager changes. One-in-five (21%) take more than three months to execute a
decision.

Murphy
said this happens because there is a lot on the committees’ agenda. Based on
the complex environment, many committees are hesitant to make any
decisions. They are unsure if they have all the information they need to make
an informed decision, and they fear they might make the wrong decision;
therefore, it takes a long period of time for a committee to execute a decision
on asset allocation.

For
pension plan sponsors, 2012 is shaping up to be a challenging year in which
there is increasing pressure for speed and quality of investment
decision-making. Since the first of the year, faced with major pension deficits
and the requirements of the Pension Protection Act (PPA), many major companies
have announced significant increases in planned contributions to pension plans.
Mercer expects to see additional announcements of large cash contributions to
plans as companies file their I0Ks over the next few weeks, and expects, for
many, this burdensome cash contribution requirement will carry into 2013.

Murphy
added that although the markets have been quite good, the only way companies
can make up the additional deficit is to make additional contributions.

“In
the corporate sector, companies are facing a dramatic increase in balance sheet
deficits in 2012 and beyond, increased income statement expense, and a sizeable
increase in cash contributions to their pension plans,” said Murphy. “For
endowments, foundations and hospitals, the problem is often the complexity of
many investment decisions and a lack of resources. Given these factors, a
delegated option should look very attractive to a growing number of boards and
investment committees.”

Staffing
may be a particular challenge for all respondents. Half of the institutions
surveyed have either one or no full-time staff managing investments, and 89% of
the respondents have no plans to change staffing levels in the coming year.

Mercer’s
survey was conducted in November, 2011 among 100 organizations with
institutional funds. Approximately 57 of these were corporations, 25 were
endowments, foundations or hospital systems, and the remainder included
professional organizations and government bodies.